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5-1965

A Production Function for the Structural Steel

Fabricating Industry of Utah
Don Ward Thomas
Utah State University

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 A PRODUCTION FUNCTION FOR THE STRUCTURAL

STEEL FABRICATING INDUSTRY OF UTAH

by

Don lvard Thomas

A thesis submitted in partial fulfillment

of t he requirements for the degree

of

~!ASTER OF SCIENCE

in

Economics

Approved:

UTAH STATE UNIVERSITY

Logan, Utah

1965
 ACKNOWLEDGMENT

I wish to exp ress my sincere appreciation and thanks to

Dr. Bartell C. Jensen, Chairman of my Graduate Committee, for his

help, suggestions, and encouragemen t that have made the writing of

this study possible.

I would also like to thank Dr. Reed R. Durtschi of my Gradua te

Committee f o r the help and moral suptJort ~ iven to me.

Finally, a note of thanks to the other members of my Graduate

Committee, Dr . B. Delworth Gardner and Dr. Donald V. Sisson, for their

time and suggestions.

 TABLE OF CONTENTS

INTRODUCTION . . . . .

Origin and Nature of Pr oblem

Objectives . . . . . .

THE FABRICATION OF STRUCTURAL STEEL

I ron and St eel 3

Structural Steel 6
Fab ri cating Structural St eel 8
Receiving materials 8
Laying out . . . . 9
Cut ti ng and holes 9
Assembling . . . . 10
Ins pec ting , painting , and shipping 10

STRUCTURAL STEEL FABRICATION IN UTAH 12

Utah's Stee l Industry . 12

Utah's St eel Fabrica t ion I ndus try 14
Structural Steel Fabrication Firms 15
Industrial St eel Company . . . 16
Al len St eel Company . . . . . 17
Empire Steel Company (American Steel Company) 18
Western St eel Company 18
Ot her firms . . . . . . 19

THE PRODUCTI ON FUNCTION FROM QUESTIONNAIRE DATA 20

Review of Production Function Theo r y 20

Sample Data . . . . . . 28
Me thod of Analysis 28
The Mathemati cal Model 30

THE PRODUCTION FUNCTION FROM DERI VED DATA AND I TS APPLICATION 34

Limi ts of Subs t i tut ion 34

Prod uct ion Func t ion 37
Estimating 39

LITERATURE CITED 44

APPENDICES 46

iii
 LIST OF TABLES

Table Page

1. Wage deflators . . . . . . . . . . 29

2. Sales and raw materials defla t ors 29

3. Mean and standard deviation of ratios by groups 36

4. Monthly data from questionnaires 50

iv
 LIST OF FIGURES

Figure Page

1. Structural steel sections

2. Flow diagram 11

3. Output-labor input relationship 23

4. !so-product curves 40
 INTRODUCTION

Origin and Nature of Problem

The steel industry , comprising one of Ut ah's largest payrol ls,

is a highly significant industry in the economic s truc t u r e of the sta t e .

Furthermore, a highly spec i ali zed s t eel fabrica ti on industry has devel-

oped as a s~b sidiary of the steel industry in Utah .

Th i s thesis is part of a study under contract between Utah Sta t e

University and the Office of t he Utah State Planning Coordinator. The

problem is one of finding the effect of changes in steel fabrica t ion on

Utah ' s economy.

Objec t ives

The objective is to derive as accur a t ely as possible, t he re-

lationships which exis t between the inputs necessa ry in t he fabrica t ion

of str uc tural steel and t he final produc t. The basic input s are:

labor , capital, and raw ma t e rials . Raw ma t e r ials are defined to in -

clude s tru c tural steel, rive t s, paint, welding rods, e t c . The output

or final prod uct s of the industry are beams , girders, truss es, bridges,

grandstands, etc. Once derived , t hese relationships wi l l make it pos-

sible t o anal yze t he factors ne cessary for futur e growth and wha t the

impact will be on Utah's economy given changes in s t eel fabrication.

More specifically, the study is conce rned with t he deriva tion

of a micro- e conomic production f unc tion for the s tructural s t eel

fabricating industry of Utah . However , since the basic engineering

relationships for the industry are not available , a Cobb-Douglas form

of the production function will be used to represent the input-output

relationships. A general model of a Cobb-Doublas form is :

where are the inputs; a , b , ... are the parameters;

and Y is the ou t put .

Statistical tests will be applied to several different models

to determine which is the most significant. Once the appropriate pro-

duction function has been derived, the implication of returns to scale

will be noted and marginal productivity functions for the various in-

puts will be found. The functions will then be used to predict the

impact of steel fabrication on employment, demand for raw mat erials,

and other important variables.

 THE FABRICATION OF STRUCTURAL STEEL

Iron and Steel

Iron was probably discovered by Stone Age men who were looking

fo r hard stones to make tools and weapons. They came upon meteorites ,

which were pieces of ma t ter that had fallen t o ear t h , and found t hat

they co ul d hammer these meteorites into various shapes . l It would ap-

pear th a t men used meteorite iron for hundreds of years without

thinkin g that there might be iron in the earth. The earlies t discovery

of iron-making was probably by means of a fire accidentally lighted

where iron ore existed near the surface of the ground . 2

The next step was to make iron intentionally in a furnace.

Primitive man mixed iron ore with charcoal in crude furnaces and learned

to apply an artificial draft. The latter consti t utes the first impor-

tant step in the development of the iron and steel industry . This

system was named the Catalan Forge , since it originated in Ca t alonis ,

Spain . 3 With this ability, iron soon became man's chief tool .

One of the oldest methods of making stee l was cemen t ation . This

me t hod consisted of heating wrought iron in stone boxes with charcoal

1oouglas A. Fisher , Steel Making in Amer i ca (New York: United

States Steel Corp., 1949) , p . 13.

2H. M. Doyl s ton, An Introduct ion to the Me t a l lurgy of Iron and

Steel (2nd ed . ; New York: John Wiley and Sons, Inc. , 1936), p. 4 .

3Ibid .
for long periods of t ime until some of the carbon was abso rbed by the

solid iron . 4 By increasing the carbon conten t o f the wr o ugh t i ron i t

was possible t o make a ve r y hard edge on weapons and tools.

I n the early 1780's, Benjamin Huntsman conceived the ide a of

making cemente d steel in a c rucible to improve the homogeneity of the

me t a LS Huntsman' s idea was to melt cemented steel in a clay crucible ,

skim off the slag , and pour the me tal int o a mo ld. This method pro-

duced a steel which was free from slag and dir t.

The so-called steel age , however , was not initiated until t he

1850's when the Besseme r Conversion Process was first introduced.

Hi t h the new method , steel was produced in tons instead of i n pounds.6

Bessemer ateel is made in a so-called converter. Th is co nve rt er is

fil l ed wi th molten iron and powerful blasts of air from hole s in the

bottom of the conve rter rush up through th e iron. The air causes the

impurities in t he iron t o be oxidized, thus converting iron int o steel.

This invention made poss i ble the production of low- cost steel and in

many ways a ide d the indus tri al development of the United States.

The open heart h furnace , the principle method o f s teel-making

today , accounts fo r nine out of t en tons of s teel produced in the

United States.7 The open heart h furnace is like a large oven .

4rbid., p. 9 .

5John \-1 . H. Sullivan, " St e el," Encyclopedia Americana (Inter-

nationa l Edition; New Yo rk: Americana Corporation , 1964), XXV, p. 563.

6Fisher , Steel Mak ing in America, p. 24 .

7ooug las A. Fisher, The \-lorld of Steel ( New York : United States
Steel Corp ., 1957), p . 17.
Limestone and steel scraps are put into the furnace and af ter t he lime-

stone and sc rap a r e melted, liquid iron is added .8 The mixture of liquid

iron, scrap, and limestone is cooked under flame for 8 to 10 hours.

This cooking process converts the mixture into steel. When the steel is

ready t o leave the furnace it is po ured into a huge ladle . The mo lten

steel then flows from holes in th e bo ttom of the ladle into molds. When

the molds are lifted, red-hot blocks of steel called ingots remain .

Open hearth furnaces currently produce more steel than any o ther

type of process. The average open hearth furnace produces about 130

tons of steel per charge of l imestone , scrap , and mo lten iron . 9

A final p r ocess which is very import an t in making steel alloys

is the electric furnace. These furnaces are useful in making steel

alloys because the heat is regulated much more precisely . Electric

furnaces empl oy only steel scrap , which is melted by electric currents.

After melting, various alloying elements are added with the steel and

cooked until they are blended into an all oy . There are many different

kinds of steel alloys . Each is made t o do a special job that plain

stee l cannot do. Electric furnaces produce about 7 percent of all the

steel made in the United States . lO Mos t of this is in the form of an

alloy .

After the mo lten iron has been refined and solidified in ingot

form, it is then mechanically worked into various shapes and ultimately

into manufactured products.

8The limestone is used in the open hear t h furnace t o soak up

impurities which form a scummy slag and float on top of the steel .

9Fisher, The world of Steel, p . 17.

lOrbid ., p. 19.
 The four main methods that are used in converting steel into

manufactured products are : Casting, which is a process of pouring

molten steel into molds of desired shapes and sizes; drawing , which· is

used in producing wire and bars; forging , which is working the hot ·

metal by hammering and pressing; and rolling, which includes the forming

of blooms, billets, slabs, strip, bars , plates , sheets , rails , structural

shapes, tubing, and pipes.ll

Structural Steel

Rolling mills convert hot steel ingots into various shapes for

different uses . Rolling is the process by which structural steel is

made . Before the ingots can be taken to the rolling mill they mus t be

at a uniform temperature of 2,200 degrees Fahrenheit.12 This condition

is obtained by means of a soaking pit, where the ingots are placed for

six to eight hours or until the temperature for roller mill conditions

is met.

The rolling mill process passes the ho t ingots between a series

of steel rolls containing various shaped grooves with projecting co l-

lars which shape the hot plastic metal . Rolling not only produces the

desired shapes , but greatly improves the quality of steel . In th e un-

rolled form, the ingot is a weak mass of crys tal s which are overlapped

and elongated during the rolling process producing greater strength.l3

11
"S t eel , " Encyclopedia Americana , p. 567.

12Fisher, Steel Making in America, p. 63.

13Ibid .
 The products of rolling mills that are used as structural

steel members are known as sections , and are designa ted by the shapes

of their cross sections. The most commonly used sections are the

American Standard beam and Channel sections, ~<ide flange sections,

H-sections, angles, tees, zees, plates, and bars.l4

I TI
Standard l-beam Tees Hide Flange Section Plates

L
An gles
[
Standard Channel
I H
Zees H-section

Figure 1. Struc tural steel sections

The middle of the eighteenth century saw exploratory uses of

iron and steel to support wood and masonry structures.l5 Wi th the

advancement of structural steel it has become one of the most important

materials used in construction of buildings, bridges, ships, etc. It

possesses strength , ductility, as well as many other desirable prop-

erties . Ingredients which affect the properties of structural steel

include carbon, which increases the strength and hardness but lowers

ductility; phosphorus, which increases strength but makes it brittle

14Harry Parker, Simpli fied Design of Structural Steel (New

York: John Wiley and Sons, Inc., 1945), p. 1.

15Fisher, The Epic of Steel, p. 102.

 8

when cold; sulphur, which decreases strength, ductility, and causes

rapid corrosion; manganese, which increases hardness and decreases cor-

rosion; and nickel, which is used where exceptional strength is

required.l6

Fabricating Structural Steel

From the rolling mill the shapes are brought to the fabrica t ing

shop, where they are cut to proper length, holes are punched to permit

riveting or bolting, and surfaces are painted after the structures are

as s emb l e d by we lding, riveting, or bolting.

Before the days of industrial combinations, structural

companies were operated as single , independent units. Pos-
sibly, many of them began with a dril + press and a chain
hoist. With increasing profits and volume of work, the
business has extended to incl ude pun ches, shears, and
riveters, until the shops were eq uipped to fabricate beam
work , plate girders, col umns, and trusses . l7

The operations within the shop require the movement of steel

sections, which is accomplished by large overhead cranes . The following

are the necessary steps in the fabrication of structural steel:

Receiving materials

The material received from the mills is unloaded and sorted in

t he receiving yard . The mill invoices are compared wi t h t he orig i nal

mill orders to check specifications. Then each piece is meas ured and

l61eonard Church Urguhard and Charles Edward O' Rouake, Design of

Steel Structures (New York: McGraw-Hill Book Co . Inc ., 1930), pp . 3-4 .

17 F. W. Dancer, Detailing and Fabricating Structural Steel

(New York : McGraw-Hill Book Company , Inc . , 1930), p. 1.
inspected for defects. If some of the structural steel sections have

chambers , they must be straightened.l8

There are certain sections that are used general l y on al l types

of structures. These materials are kept on inventory and are known as

stock ma t erials. 19 Some of these sections are sold direc t ly, t herefore ,

the fab r icating shops act as ret ai l outlets for the rolling mills .

Laying out

The laying out process is ma r king the steel directly for

punching and shearing , and is accomplished by the use of "temple t s"

'tJhich are made from e n gineers ' drawi ugs . 20 In a shop eq uipped with

modern punching machines , the l aying out process is reduced since t he

machines can be programmed to punch most of the ho l es.

Cutt i ng and holes

The shops save cutting expenses by or dering materi als alre ady

cu t to len gth from the ro l ler mills . ~.JJ'len cut ting is necessary , however ,

it is accomplished by: Shears , which cut plat es and angles by a sing l e

stroke of a blade that comes down against a die; and sawing , which cut s

ei t her by means of a circular saw, or flame. The lat ter i ncludes

cu tt ing by an electric arc , ace t ylene , or other gas f l ames . 21

Jiol es a r e cut into ste el when bo lt s o r rivet s a re used , and a re

made by dr illing or p un ching. Drill ing i s preferable because i t does

1 8rbid. , p. 208.

l 9rb i d . , P· 210 .

201Ei£., P· 221.

21 rbid. , pp. 246-251.

 10

not damage the metal around the hole. Punching is, however, the most

commonly used method because of its low cost. There are limitations to

the thickness of materials punched.22

Assembling

This is the process of fitting the individual sections into a

complete structure. The sect ions are assembled then riveted, bolted ,

or welded. Hot rivets are passed through the holes in the steel and

the plain end is pressed down to form a second head . As the rivets

cool, there is a sl i ght shrinkage in length and the two plates are

drawn tightly together.23 Welding, in addition to reducing construction

noise, has the followi n g advantages : It makes very rigid frames , is

easy to connect new work to existing structures , and has an economic

advantage since holes are not required. 24 l<elding relative to riveting

and bolting is increasing in importance.

Inspecting , painting, and shipping

The inspection is generally done by companies specializing in

steel inspection. They are employed by purchasers to check the quality

of the workmanship , materials , etc. If t he structure is accep ted, t hen

it is cl eaned by gasoline or sandblas t ing , and painted t o prevent cor-

ro sion . The st ructure s are shipped by truct or railroad to the con-

struction site.

22Ibid . , PP· 223-224.

23Harry Par ker , Simplified Design of Struc t ural Steel , p. 131.

24Ibid., p. 156.
 11

Since most contracts are l e t under bid the following costs

must be considered in determining bid prices : the mill cost o f raw

materials , shipping costs from mill to fabricator , cost of shop

drawings and templets, shop fabricatin g cos ts, cos t of shipping fabri-

cated wo rk from shop to site , erec t ion costs if called for , and over-

head and profit.25 The engineer can aid in lowering the cost of

fabricat i on by making simple designs so there is as little moving of

materials as possible, and a minimum of f abri cation.

The following i s a flow diag ram o f a struct ural steel fabri-

eating shop:

(--I Sold Directly I

IEngineering l---7 Layout

Assemb ling

Inspect ion
and
Pain tin g
and
Shipping

Figure 2. Flow Di ag ram

2 5Boris Bres ler and T . Y. Lin, Design of Steel Struct ures ( New
Yo rk: John Hiley and Sons , Inc ., 1960), p . 13.
 STRUCTURAL STEEL FABRICATION IN UTAH

Ut ah ' s St eel Industry

Seve ral years following the advent of t he Mormons into Ut ah ,

significant deposits of iron and coal were discovered in the ar ea now

known as Cedar Cit y .l Within a shor t time a coloni zing company built

a crude blast furnace and ip the year 1852 produced the firs t pig iron

west of the Missouri River . 2

This operation , however, because of Indian uprisings, flash

floods, windstorms , and other such events was not a commercial success

and, in 1859, was finally abandoned. In the seven years of operation,

an estimated 25 tons of pig iron was produced. 3

The next venture at iron making in Utah was undertaken by the

Great Western Iron Manufacturing Company at Irontown . In 1868 it began

operations with a daily capacity of 2 , 400 pounds of pig iron . This

operation, like its predecessor , was not a financial success and in

1893 ceased operations.4

lPublic Relations Depar tment, Utah-Intermountain District,

United States Steel Corporation, Growth of the Iron and Steel Industry
in Utah (Provo, Utah) , p. 1.
2or. Walthe r Mat hesius, "The Growth of Wes t ern St eel ," addressed
to a Joint Meeting of the American Society for Me t als and the American
Institute of Mining and Metallurgical Engineers , September 24 , 1951,
Los Angeles, California, typescript, Department of Economics, Ut ah State
University.

3E1Roy Nelson , Utah's Economic Patterns (Salt Lake City , Utah :

University of Utah Press , 1956), p . 102.

4Dr. 1-lalther Mathes ius, "The Growth of \-/estern Steel."

12
 13

With its accompanying needs for s teel and steel products, World

\,Tar I brought abou t the creation of the Utah Iron and Steel Company in

1915. Its plant, located at Midvale , Utah, had a single open-hearth

furnace with a daily capacity of 150 tons of steel. At the close of the

Har, however, the cancellation of government contracts brought about

financial ruin a nd forced the company, wh ich had expanded on the basis

of the government's need for steel, to cease operations.s

The next important development of the steel industry in Utah

came in 1941-42 when the government, as a result of World War II,

decided to increase the steel producing facilities of th e \,Tes t. This

was done to guard against a shortage of steel supplies to the Pacific

Coast shi pbuilders in th e event the Panama Canal were to be closed

from enemy attacks.6

The new mill was constructed near Provo, Utah. This site

possessed adequate transpor t ation facilities and was close to sources

of both iron ore and coal. The plant was nearly completed by the end

of 1943 and the first open-hearth steel was produced in January, 1944. 7

The new plant cost more than $200 million and had a rated capacity of

1,150,000 net tons of pig iron and 1,283,400 tons of steel ignots per

year.B

At the end of the war the plant was virtually closed and the

5crowth of the Iron and Steel Industry of Utah, p . 4.

6Ibid., p. 5.

7T. J. Ess, "United States S teel 's Geneva ~'larks , '' Iron and
Steel Engineer, June 1959, p. G-4.

BElRoy Nelson, p. 109.

 14

facilities were offe re d for sale by the government . U. S. Steel pur-

chased the plant in June, 1947, for $47.5 million with the stipulation

that an additional $18.6 million be spent in conversion to peacetime

operations.9 The plant's capacity was subsequently increased and

altered for commercial production.

The Utah Division of United States Steel, known as the Geneva

plant, produces primarily strips and plates which are shipped to the

\-lest Coast for further processing and final marketing. Only about 15

percent of their output is retained in the Mountain \-lest . \o/hile the

steel market on the West Coast has shown considerable expansion in the

past two or three decades, the market in the Intermountain lo/est has

remained rather stable, absorbing only a small fractio n of the steel

produced in Utah.10

Utah's Stee l Fabrication Industry

With the completion of the Geneva plant in Utah , a steel fabri-

cation industry was soon established t o take advantage of the close

source of raw ma terials.

The first satellite industry to be s t arted in Utah as a

result of this availability of steel , is being promoted
by the Structural Steel and Forge Company, which pur-
chased the government-owned vanadium plant in Sal t Lake
City. lo/hen completed, the new plant will employ 100
men. The business will be devoted to the fabrication of
steel to be supplied by the Geneva Steel Plant . ll

9rbid., p . no.
lOibid.

llrhe newspaper clipping collection of Leonard J. Arrington ,

Department of Economics, Utah State University.
 15

However, since certain kinds of steel used by Utah ' s fabri-

eating industry originate in far parts of the nation, the price and

freight cost advantages to Utah's firms of using Geneva's products is

in part offset by the high cost of materials that must be shipped from

distant points. Therefore only i n the manufacture of products geared

to the use o f Geneva ' s output is there a cost advantage to Utah firms.l2

Product s that are available through Utah 's s t eel fabrication

firms include pressure tanks, filters, structural steel, rail car wheels,

decorative iron work , etc. A number of these products are used nation-

ally and internationally, but most are used locally.l3

Transportation costs become an important factor in the total

marketing costs of fabricated products . By avoiding high transportation

costs, a local industry has a certain economic advantage over a similar

industry compe t ing from a distant location . Most of Utah ' s stee l fabri-

caters , however, report their market t o be "the Intermountain region"

unless they have patent rights which virtually place them in the posi-

tion of a monopolist for a particular product.l4

Structural Steel Fabrication Firms

The structural steel fabrication industry of Utah is rather

specialized , and produces most of the fabricated steel used in th e

12Bureau of Economic and Business Research , "The Stee l Fabri-

ca t ing and St eel- Using Industries of Utah," Ut ah Economic and Business
Review, University of Utah, Vol. II , No. lA, Sep temb er 1951 , p. 60 .

13salt Lake Tribune (Salt Lake City, Utah), January 15, 1958.

14"The Steel Fabricating and Steel-Using I ndus tries of Utah ,"

p 0 67 0
 16

construction industries of Utah and the Intermo untain region. There

a r e fifteen companies in the state that fabricate structural steel .

These companies are all located in the Ogden, Provo , and Salt Lake City

area . Together they employ about 890 "orkers with an annual payroll of

$4,797,266. 1 5 Products manufactured by the struc tural steel fabrication

industry in Utah are: 16

trusses cashier cages boxing rings

building frames tool cribs basketball hoops
guard rails car transfers lamp posts
bleachers bridges street lighting lamps
grandstands switches brackets
flag poles frogs knock- down basket floors
stairs swings fence posts
railings sliders window guards
fire escapes teeter-totters machine guards
trick bars ornamental products

A brief des crip tion of some of the more important struct ural

steel fabricating firms is presented in the remaining pages of this

chapter.

Industrial Steel Company

Before 1929 the Industrial St eel Company was known as the

Builders Steel Company . In 1929, after bankruptcy, it was purchased by

its present owners at a creditors sale. The firm was then operated as

a partnership until 1944 when it was incorpo rat ed. The plant is located

at Sixth South and Fourth Hest Stree t in Salt Lake City.

The company fabricates steel structures , and wholesales steel

to other smaller constnners. This warehousing of s t eel has become a

major part of the business during the past few years. Officials of the

16L. Victor Riches, "The Steel- Using Industry of Utah" (unpub-

lished MS. Thesis, University of Utah, 1951), p. 38.
 17

firm say that warehousing is a profitable business for both buyer and

seller. Buying in large quantities from the producer enables the

wholesale warehouse to purchase at much lower rates . After different

fees are added for service and commission, the consumer buys for less

than if he were to make small purchases directly from the mill.

The steel work incorporated in many structures throughout the

area has been contracted by this firm. Some contracts have been as

far away as Sacramento, California, but their primary market is the

Intermountain area and particularly Utah. Depending upon the number

of contracts , employment varies between 25 and 100 workers.l7

Allen Steel Company

The Allen Company was organized in January, 1947, by Mr. Robert

B. Allen and is located at 1340 South First West , Salt Lake City.

The company purchases their structural and reinforcing steel

from the Geneva plant, the Colorado Fuel and Iron Company, and other

mills . Part of this steel is fabricated into beams , trusses, columns,

and other products for use in industries. The balance of the steel is

sold directly through the company's warehousing operations.

The plant size has been increased regul arly. The company has

approximately 4 , 000 square feet of office space , 10 , 000 square feet of

enclosed fabricating space, and an outdoor yard and storage area of

approximately one acre . They employ between 100 and 249 workers.l8

17 "The Steel Fabricating and Steel-Using Industries of Utah, "

p. 22 .
18 Ibid. , p . 43 .
 18

Empire Steel Company (American Steel Company)

The Empire Steel Company incorporated in April, 1950, was an

outgrowth of the Ellis Steel Company , a fabricating firm organized in

1943. It is located at 830 South Sixth West in Salt Lake City. The

fabricating shop is 78 feet wide and 204 feet in length.

The f].rm operates as a structural steel and reinforcing steel

fabricator for commercial and industrial construction. The market in

which the company makes its sales consists of Utah, Wyoming, and

Colorado. Most of the contrac ts are in Utah and include churches,

schools, commercial buildings , etc.

Raw materials are purchased from many different sources . Some

steel is shipped direct from Geneva , from Pittsburgh and Torrance,

California, and from the Colorado Fuel and Iron Company. Other material

is obtained from local and West Coast warehouses. The raw material used

are structurals, including wide -range beams, bar size shapes, reinforcing

rods and reinforcing mesh. They employ between 25 and 99 workers. 1 9

We stern Steel Company

This firm started ope rations in October, 1945, under the name

of Western Steel Supply Company. In January, 1947, it was incorporated

as the \o/estern Steel Company. Offices are maintained in the Beason

Building in Salt Lake City. A modern shop located at 651 West Seven-

teenth South was completed in 1949. The shop building is of steel

construction, and is 220 feet long and 115 feet wide, with an outside

crane area of 76 feet in l engt h and 380 feet in width.

19rbid. , pp. 45-46.

 19

Production is in the area of reinforcing and structural steel

fabrication.

Raw materials are obtained from various mills: angles, stand -

ard beams, plates, and channels are obtained from Geneva; wide flange

beams from Pittsburgh and Chicago; bar size angles , reinforcing steel ,

channels, and other shapes from Colorado and the Pacific Coast.

The market area served includes Utah, Montana, Idaho, Wyoming,

Nevada, Oregon, Washington, and western Colorado. They employ between

100 and 249 workers.20

Other fi r.ns

In addition to those companies described, there are in t he

state of Utah, eleven other structural steel fabricating firms: Cob us co

Steel Products, 660 South West Temp le, Salt Lake City; Commercial

Shearing and Stamping Company, P. 0. Box 2030, Salt Lake City; Gerstner

Stee l and Supply Company, Inc., P. 0. Box 336, Salt Lake City; Monsey

Iron and Me t al Company, Inc., 750 South 3rd West, Provo; Ogden Iron

Worker Company, Inc., 185-23 Street, Ogden; P. I. Street Corporation,

3100 South 11th West, Ogden; Provo Steel and Supply Company, 1400 South

Sta te, Provo; Steel Contractors , Inc., 6 Orange Street, Salt Lake City;

Steel Eng ineers Company, 1526 South West Temple, Salt Lake City; Eimco

Corporation, 545 West 7th So uth, Salt Lake City; and Taylor Steel Corpo-

ration, 1363 Major Stree t, Salt Lake City.21

20rbid., p. 56 .

2lu t ah Committee on Industrial and Employmen t Planning,

Directors of Utah Manufactures, 1963-1964, p. 49.
 THE PRODUCTION FUNCTION FROM QUESTIONNAIRE DATA

Review of Production Function Theory

The production function is the economist's way of stating

symbolically th a t the output of a firm depends on its inputs . It is

generally wr i tt en as y = f(x , x , ... , xn )' which means th at the

1 2
total product , y, depends on the amounts of the various inputs ,

xi , x , . . . , x , used by the fi.rm per u~it of time .

2 0

Consider a process of production requiring two inputs. Let

and be the respective quantities of the two inputs and y be

the quantity of output . Then the production f unct ion can be written

This function provides a complete catalogue or quantitative description

of the various quantities of the two in put s which can be employed to

produce y. Strictly speaking , we should think of this func ti on as

providing us with the largest output, y, which can be produced by given

x and x . There are some production decisions which can be made on

1 2
purely technical grounds wi t hout any knowledge of costs wha t soever .

These decisions can be called engineering decisions as opposed to

economic decisions. Thus , if a modification of the manner in which a

process is performed allows the same output to be produced , and permits

t he quantity of at least one input to be reduced 1o1i t hout requiring an

increase in the quantity of any other input, then a decision in favor

of the modification can be made on engineering grounds alone without

20
 21

any know~edge of input prices. An action which saves on one input

without altering any other requirement of a process will lower cost

regardless of the price of that input.

The production function discussed above presupposes all such

engineering decisions have been made. In constructing this function

all methods , techniques , or processes which require more of one input

and not less of any other input are rejected. Once all such engineering

decisions have been made, we are left with the best engineering tech-

nology. But with this technology we are still left with a large number

of input possibilities which have the characteris tic th at output cannot

be maintained at a given level when one input is reduced, unles s we in-

crease some other input . The ch oice among these remaining input combi-

nations is an economic decision in the sense that the decision requires

knowledge of input prices.

Briefly s tated, economic decisions require knowledge of input

prices and best engineering technology. Engineering decisions are con-

cerned with best engineering technology and require technical knowledge

of physical processes.

The production function as we have defined it will , in general,

be expected to exhibit the following characteristics:

1. If either input is held constant while t he other is in-

creased (decreased), output will increase (decrease) . Mathematically,

this is equivalent to stating that 3f/ax > 0 and 3f/ax > 0. The
1 2
partial derivatives af/ax and 3f/ax are called the marginal pro-
1 2
ductivities respectively of x and x2 in the production of y. In
1
other words , the marginal productivity of input Number l is th e r ate at

which output changes with respect to the changes in t he quantity of

 22

input Number 1 used, the quantity of input Number 2 being held con-

stant.

2. If output is held constan t, a decrease (increase) in one

input will require an increase (decrease) in the other input. Mathe-

matically, ax2/axl < 0, and the partial derivative ax2/a xl is the

marginal rate of substitution between and

3. If y is held constant, the marginal rate at which x

1
substitutes for increases as increases. Mathematical ly,

and we say that the production function is convex to the origin in the

These characteristics of the typical production function can

be summarized with an iso-product map . An iso-product contour (con-

s t a nt output curve) is a curve connecting all those combinations of

and that are required t o produce a specified quantity of out-

put. An iso-product map is simply a family of such curves , each curve

corresponding to a different level of output .

The statistical investigation into laws of production by C. W.

Cobb and P. H. Douglas are among the most celebrated in the history of

economics. They proposed the general function

y AnCtkSu,

y output ,

n labor input ,

k capital input,

u random disturbance,
 23

as a fairly universal law of production and estimated it in numerous

samples of manufacturing industries throughout the world. This expo-

nential type of production function has no more claim to general

validity as a description of technology than other mathematical functions.

However, it does have many interesting properties that make it a very

convenient choice.

The Cobb-Douglas function has constant elasticities of output

variation «ith respect to labor or capital input .

o = elasticity with respect to labor input .

elasticity with respect to capital input.

The relationship is nonlinear. For constant levels of capital,

the output-labor input relation is shown as a series of curved lines in

the following figure:

Figure 3. Output-labor input relationship.

If either input is zero (n = 0 or k = 0), outpu t is zero . Thus , both

inputs are necessary to the production process. The curvature is such

(each elasticity assumed to be less than unity) that marginal produc-

tivity falls as input grows. There is no asymptotic level of output

(or ceiling) beyond which production cannot grow , but the rate of in-

crease decreases at high levels of input.

 24

Although the function is nonlinear, it can be transformed with

ease into a linear function by converting all variables to logarithms.

In logarithms, the associated linear function is

log y = log A + a log n + 8 log k + log u,

or

y' = A' +an' + B k' + u'.

I n terms of the primed variables we have a linear function. Scale

changes in the basic units of measurement have no essential effect on

any of the terms in this logarithmic formulation except the constant

A'. Therefore, this function is convenient in international or inter-

industry comparisons. Since a and are elasticity coefficients,

they are pure numbers and can easily be compared among different samples

using varied unit s of measurement.

In a sense, one is able to capture the flavor of essential non-

linearities of the production process and yet benefit from the simpli-

fications of calculation from linear relationships by transforming to

logarithms. The logarithmic function is linear in the parameters,

which is an essential point to the statistician. Other functions may

give a similar type of curvature and keep linearity in parameters . A

parabolic function would be an example.

x = a + a n + a k + a n2 + a k2 + a nk + u.
1 1 2 3 4 5

However, this type of equation uses many more parameters than

does the Cobb-Douglas form. The latter is economical in the use of de-

grees of freedom, or parameters, and yet gives us nonlinearity.

The parameters of the Cobb-Douglas function, in addition to

being elasticities, possess other attributes important in economic

 25

analysis . The sum of the exponents shows the degree of "returns to

11
scale in production.

a + < l decreasing returns to scale ,

a + l constant returns to scal e ,

(l + s > increasing returns to scale .

Suppose th at each input is increased by r percen t.

n increased to n(l + r/100) ,

k increased to k(l + r/100).

The y out put is increased by less than r percent , by percent ,

or by more than r percent, according to whether there are decreasing ,

11
constant , or increasing "returns to scale. This is easily seen by

substituting into the function

y = Ancxk Su,
y(l + r /lOO)a+S = A(n(l + r/lOO)) cx · (k(l + r/100)) 8 u.

It is an impo rt ant economic question whethe r the s t atistics of an in-

vestigation show ex + S to be less than, equal t o , or greater t han

unity. The sum of these coefficients shows the deg r ee of "homogeneity "

of the function. If ex + S i s equal t o unity, we say that the produc-

tion f unction is homogeneous of the first degree .

Marginal pro du c t ivi t y of any factor i s the slope of the function

graphed i n the out put-factor input dimensions when all o ther inputs

are held const ant. It was no t ed above that the mar ginal productivity

changed as we moved along the curve at different levels of fac tor i n-

put. We noted, however, that the Cobb -Douglas f unc tion to ok on a linear

form when expressed i n l ogarithmic i nstead of arithme ti c units. We can,

therefore, write
 26

(change in logarithm of output )/(change in logarithm of labor

input) = a when the capital input is held constant. The change in the

natural logarithm of some variable is the same thing as the percentage

change . We can, therefore, also wri te

(percentage change in output) /(percentage change in labor in-

put) = a when the capital input is held constant. A ratio of per-

centage changes is simply a ratio of absolute change s multiplied by the

inverse ratio of levels of the two variables. The limiting value of

absolute changes for the infinitesimal inc rements is, howeve r, the con-

cept of marginal productivity . We can, therefore, write

(percentage change in output)/(percentage change in labor

output) = a

((labor input)/(output)) (marginal productivity of labor) = a .

This brings us to the importan t property of the function: marginal and

average products are proportional, where the factor of proportionality

is the associated exponent.

Marginal productivity of labor= a (out put )/(labor input)

a (average productivity of labor),

Similarly , we find

marginal productivity of capital (average productivity of

of capital).

The Cobb -Douglas production function had its beginning in 1928

when Senat o r Paul Douglas , a member of Un iversity of Chicago ' s Economics

Department, so ught to derive a production function for the United

St ates economy. This work was a pioneering effort i n this field.

Douglas, together with Charles H. Cobb , a ttempt ed to determine the

 27

influence of capit al and labor on production in the United States for

the years 1899-1922. Capital, labor, and production were all measured

in terms of index numbers with the method of least square employed to

obtain estimates of the parameters of the function. The following

function is a log linear homogeneous Cobb-Doublas production function: 1

P = 1.01 L3 / 4 c1 / 4

Since that time production functions have been derived for

Australia , 2 India,3 and other countries .

A form of the Cobb-Douglas production function has also been

used to derive manufacturing relationships for different industries .

Vernon L. Smith completed a study on the trucking industry in which a

Cobb-Douglas function was used to explain the relationship between the

inputs and outputs.4

Once the input-output relationships for Utah's structural

steel fabrication industry, as described by a production, are known,

it will be possible to analyze the impact on related industries for

given changes in structural steel fabrication.

1 Paul H. Douglas, The Theory of I< age (New York: The Mac-
millan Company, 1934), p . 133.

2E . Brown, "The Meaning of the Fitted Cobb-Douglas Function ,"

Quarterly Journal of Economics , 71:546-66 , November 1957.

31 . Marti, "Production Function for Indian Industry,"

Econometrica, 25:205 - 21, April 1951.

4vernon L. Smith, "Engineering Data and Stat is tical Techniques , "

Econometrica, 25:281-301, April 1957.
 28

In this thesis a modified Cobb-Douglas function of the form

y xl
n

will be used, where the X (i = 1, n) represen t s inputs and Y,

i
the output of fabricated steel.

Sample Data

The data consists of monthly accounting figu re s from a sample

of firms described in t he preceding chapter. Variables on which obser-

vations we re made are: Raw materials purchased from roller mills ,

other raw ma t erials purchased, wages paid, salaries paid, depreciation,

and sales of manufactured goods.

In order t o obtain da ta which is representative of the ind ustry

as it now exists and over a t i me period for which technology was rela-

tively stable or unchanging, the years 1960, 1961, 1962, and 1963 were

chosen . A mailed questionnaire was used to collect the data after

permission was grant ed by an officer of each company. A sample ques-

tionnaire is included in Appendix A. The data received is in Append ix C.

Method of Analysis

Before regression was performed on the data it was first cor-

rected for price level change. It is necessary to have t he data in

real terms since production function theory is based on real t erms and

the data co llected was in money terms. The deflators used for wages

and salaries paid are set forth in Table 1. These data were computed

from the average hourly earnings for the fabrica ted me tal products

i ndust ry of the state. A base year of 1957--59 was used.

 29

Table l o \-/age deflators

1960 1961 1962 1963

January 102o5 111.6 112 oO 115 o8

Feb ruary 101.2 109 09 112 o8 116 o2
March 102 o0 112 o4 115o8 117 o5
Ap ril 103 o7 111. 2 113o 3 118o 7
May 103o 3 114 o5 115o3 116 02
June 105 o4 115 o0 114 o9 116 o6
July 102 o7 115o8 114o 9 116 o2
August 101. 2 109ol 114 o5 115 o8
Sept ember 10l o2 109 ol 115 o3 114 o5
Octob er 101.2 109ol 116 o2 115o 3
November 102 o0 112 o0 114 o5 114o 5
December 103o 7 114o5 114o5 ll 4 o9

So urce: Utah Depar t ment of Employmen t Security,

Utah Annual Report Supplement (1957, 1958,
1959, 1960 , 1961, 1962, 1963 )o

The def l ators used for sale s and raw materia l s pur chased were:

Table 2o Sales and raw materials defla t ors

1960 1961 196 2 1963

January 101.8 lOO ol 100 o6 98o8

February 101.4 100o4 100o4 98 o6
Ma rch lOOo 7 100o8 99 o8 98 o4
April 100o7 101.1 99 o6 98 o5
May 100 o6 lOOo 7 99o2 99o3
June 100o4 100o8 98o6 99 o0
July 100o1 100o6 98o6 99o0
August 100o4 100o9 99 ol 99o0
Sep t ember 100o2 101.1 99o0 99 ol
Oc tober 99o8 100o9 98o 7 99 o9
Novemb er 99o5 lOOol 98o4 99o9
December 99 o6 lOOo 2 98o7 lOOoO

So urce : Uo S o Depa rtment of Comme rce , Office of

Business Economics , Survey of Current
.!1_usiness , Vol. 40 , 41, 42 o
 30

These figures are taken from the iron and steel portion of the who l e -

sale price index published in the Survey of Current Business. Base

year was 1957-59.

After the data was deflated to represent an index of real

rather than money values, it was converted to its log (natural) form.

The Mathemati cal Model

The first hypothesis tested was

where x1 represent s raw materials from roller mills , x2 other raw

materials, x wages, x salaries, and x the amount of capital

3 4 5
used (depreciation). A multiple regression analysis yields the fol -

lowing results:

y 39 x l-054 x 2- 292 x 3-5 35 x-.343

4
x-300
5

with an R
2
= .69. Although the model fits the data rather well, the

negative coefficient for x4 implies a negative marginal productivity

f or salaried personnel. This can in part be explained by the inter-

relationships betwee n the variables . If output we re to rise th e

X1 , x2 , X3 , a nd x5 variables would likely rise directly, but x4

or salaries would likely remain somewhat cons t ant . So there wo uld not

be as direc t a relationship between output and salaries as between ou t-

put and the other variables . This could cause the coefficient to be

negative.

~.Jages and salaries were then combined into one variable. Since
 31

depreciation was made available only on a yearly basis,S and since

the total amount was less than two percent of total sales , it was

deleted from the model.

Therefo re, the second hypo thesis was:

where x1 represents raw materials from the rol ler mi ll s , Xz was

other raw materials, and x3 was wages and salaries . The resulting

parameters w·ere:

with an R2 = .64. Although the x1 variable (materials from the

roller mills) was the largest of the input s (and logically an impor-

tant one) , it was not significant at either the .01 or .OS leve l. 6

This migh t well be expl ained by the warehousing function carried on

by some of the companies. lfuen they receive a contract , they try to

order as much of the struct ural stee l pre-cut from the mill as pos-

sib l e. This reduces the expense of cutting at t heir individual plant s .

Fur thermore, with a warehousing ope ration , they maint ain some inventory

for the occasional buyer . A certain amount of structural s teel is

purchased each month. Some will be sold through the warehouse and the

remainder will be used for the con trac t s . There is no way of separating

what was used fo r contracts and wha t was used for th e warehousing

5 The othe r data were made avai l able by months.

6The analysis of variance for these mode ls can be fo und i n

Appendix B.
 32

operation. So this could account for the non-significance of the X

1
variable.

The roller mill products and the other raw mat eri als inputs

were then combined to form another hypothesis .

Thus, the third hypothesis tested was:

where x1 represents all raw materials and x2 wages and salaries .

The results 1;ere : 7

with an R2 = .60.

The analysis of variance for the Y axi xj model is as

1 2
follows:

Source d . f. Mean Square

To t al 83

xl 1 2.6959

x2 1 1. 6610

Model 7 .1658

Error 81 . 1173

7The interpretation of x : The average of the percentage of

1
X1 that consists of roller mill products was 58.7 percent wi t h a s t and -
ard deviation of 16.7 percent . The percentages were found to be normal-
ly distribut ed. Confidence intervals were then constructed around t h i s
average t o give some guide for interpretation of the func t ion. The
con fidence interval is:

P(62.26 > X > 55.14) = . 95

Therefore, of the x1 variable , 58.7 percent is structural steel and

the remainder ot her raw material inputs such as pain t, rivets, etc .
 33

The tests for significance are:

Fx 22.98
1
Fx2 14.16

Fmod 61.09

Therefore the two variables plus the model are significant at both the

. 01 and . OS level. This means that the probability is less than .01

that these results are due to random variation.

Expressed in log form , the above function becomes:

This function , when used to make forecasts, yields va lid

results only in the median range of the data . This can be explained

by the inventory changes which cannot be neted away from the input

data. That is, some months when output was low, purchases of r aw

mate ri als and labor were higher as a result of new contracts which we re

to extend over several months. When sales were high--sales which in-

cluded output produced earlier--purchases of raw ma te rial and labor in-

puts were low. As a result of varying lengths of contracts, there was

no relationship between the high and low sales mon ths. This made it

impossible to make an appropriate adjustment on the data. Actually,

t he function fits the data, but the unadj usted data is not realistic

since it i nc lude s i nvento ry changes. In the next chapter a fun c tion

will be derived from generated data which eliminates these changes.

 THE PRODUCTION FUNCTION FROM DERIVED DATA AND ITS APPLICATION

In the last chapter a production function was derived from

questionnaire data which contained inventory changes. In thi s chapter

a f unction will be derived from data adjusted t o eliminate the eff ect s

of these changes .

Limits of Substitut i on

From a theoretical point of view, the Cobb-Douglas production

function has unlimited substitution between variables. This is in-

herent in the al gebraic properties of the model. \-lith unlimited sub-

sti tution between variables t he function wi ll be of little or no value

in forecasting the e ffec t of increases or decreases in demand fo r the

final product on the inputs.

In order to establish the degree of substitu t ion between i n-

put s for the current problem, ratios of total sales to labor inputs

and total sales to raw materia l inp uts were computed .

I
total monthly sales
monthly labor cos t s

total monthly sales

mont hly raw material
cos ts

The ratios were graphed and the percent between ± one standard devi-

ation and ± two standard deviati on was comp uted. The r at i o s were

found t o be normally distribut ed. The l abor ratios have a mean of

 35

3.98 and a standard deviation of 1.99 ; i.e. ,

n
L = E Li 3 . 98
i=l
n

1. 99

Given this informati on , a 95 percen t confidence interval yields the

following:

p (3.54 < 3. 98 < 4 . 40) = .95.

The raw material r a tios have a mean of 1.64 and a standard deviation

of . 83; i.e.,

n
M= l E Mi 1.64
n i=l

The co rresponding 95 percent confidence interval is:

p ( 1.46 < 1 . 64 < 1.82) = .95 .

The se conf idence in terval s indi ca te that there is very lit tle

subs titution between the i n put s for a g ive n output. This was s uspected

because of the nature of the industry where a given amount of s teel and

l abor i s necessary for production. It is ap parent that the range of

s ubs t i t ution of labor i s greater th an t he range of sub s titution of raw

mate ri als . This results from contract s or jobs wh ich require a cer tain

amo unt of structura l steel wi th the labor requirement flexible to vary

depending on the amount of handl i ng , etc. These limits may be

 36

somewhat overstated because of the heterogeneity of the contracts.

Given an increase in demand for final output, all other things

equal, the raw materia l needs can be forecast from i ts ratio , or the

labor needs from its ratio. These forecasts are expected to be ac -

cura t e since the con fidence intervals for each of the ratios--tota l

sales to labor costs , total sales to raw ntaterial costs--is very small.

In order to determine (a) if there is any change in the de -

gree of subs titution between inputs as output i ncreases, and (b) the

poin t s at which further substitution is impossible (points at which

the isoproduct contours become vertical on one side and horizontal on

the other) , t he data were classified according to the following gro ups

and subjected to an analysis of variance.

Table 3. Mean an d standard deviation of ratios by groups

Number Labor ratios Raw materials ratios

Sales in dollars of Standard Standard
observations Mean deviation Mean devia tion

35 , 000 - 50,000 14 3.90 3.07 1.67 .92

51 , 000 - 65 ,0 00 11 3.81 2.22 l. 32 .65
70 , 000 - 95 , 000 19 4.07 2.53 1.49 .97
96 , 000 - 115 , 000 12 4.16 1. 79 l. 87 1.07
125 , 000 - 175,000 15 3. 93 1.87 l. 86 .66
180 , 000 - 340,000 10 3.93 1.08 1.61 .41

The analysis of varian ce was us ed to determine if there we re any

sign ifi can t differences between group means. The following results

were obtained:
 37

Analysis of varian·ce (labor):

Source d. f. s.s . m. s . F.

Groups 1.013 . 2025

Error 75 149.51 1.9974

Total 80 150.52 . 1013

Analysis of vari ance (raw ma t erial s ):

Source d. f. s .s. m.s . F.

Group 3. 0391 . 6080

Erro r 75 60.61 .8080

Total 80 63.65 . 7525

F
5 , 75 = 2. 35

\ve s ee from the analysis of var ian ce tha t for bo th labor and

the raw ma terial input s there is no signifi cant diffe re nce be t ween the

group means at differ ent levels o f produc tio n . Thus tve wi ll assume

that at each level of output the 95 percent con fidence in tervals on

the labor and raw mat e r ial input ratios repre sen t the bounds beyond

which further substit ution is impossible.

Produc tion Function

As indicated i n the preceeding chapter, the pro duction function

de rived from monthly questionnai re data wa s, as a res ul t of inventory

problems, valid only i n the mid-range of the outputs. This problem of

ove rl apping of invent ories could i n part be sol ved by aggregating the

da ta into quarterly s ets, but the re would still be some overlapp ing of

inventories. Ano t he r possibili t y fo r s ol ving the problem would be to

 38

use only data for those months where there was little or no overlap ,

but this would raise a question of validity and perhaps give a false

picture . It was thus decided to generate the l abor and raw material

inputs for different levels of output by means of the input ratios

described above . That is , for a given level of output, divide output

by the mean of the L ratios to obtain the lab or input requirement, and

similarly divide output by the mean of th e M ratios t o obtain th e raw

materials requirement; i.e ., given an output level of $100,000 the in-

put requirements would be $100,000/3.98 f or labor and $100,000/1 .64 for

raw materials. Since there were no significant difference s between the

means of the input ratios for different levels of output and since the

confidence intervals were small, it is expec t ed that the inputs

generated for the various output levels will be reliable. On the basis

of the genera t ed data, the following parameters were obtained for th e

func ti o n

where x1 represents raw materials and x2 labor . Th is eq uation has

constant returns to scale and will be used t o make forecasts for the

structural s t eel fabricating indust ry.

The marginal phy sical products for the two inputs are as

follows:

748 X.66 x-. 66

• 1 2

Using t he limits of substitution as defined by the above

 confidence intervals, contours for the function can be generated for

different levels of output. Figure 4 represents a set of such contours

derived by using the labor ratios to find the labor requirements for

given output levels, and the function to find the raw material require-

J ments . The points at which the curves become vertical or horizontal

represent the limits of substitution between inputs.

Es timating

Virtually all of the output of the structural s teel fabricating

industry is sold to the construction sector of the state . Therefore,

factors that affect the construction industry will also affect the

fabrication of structural steel. The returned questionn a ires indicate

that the majority of the sa le s were to general building contractors

in the state and the rest went to the general construction sector . l

One factor that could have a significant influence on the

structural steel fabricating industry is the $57 million bonding bill

that was passed by the Utah State Legislature for the construction of

additional college buildings. Of this $57 million, $2 million will be

used for land purchases and the remainder for building construction.2

The t wo main type s of building construction are the steel

super structure type and the concrete super structure type. The contract

for the steel super st ructure t ype is about 15 percent structural steel

1General building contractors are primarily engaged in the con-

struction of dwellings , office buildings, stores, etc. The general
construction sector includes contractors who build highways , bridges,
dams, etc.
2Salt Lake Tribune (Salt Lake City, Utah), February 3, 1965.
 40

40,000

30,000
00 120,000
........""'
0
3
20 ,000 90 , 000
,D
"0
"'
...J

60 , 000
10,000

0 0 0 0
0 0 0 0
0 0 0 0
0 0 0
~ co
"' "'
Raw ma t erials (dollars)

Figure 4 . Iso -produc t curves

 41

and for the concrete super structure is about 7 percent structural

steel . The majority of these materials will come from Utah ' s struc-

tural steel fabricating industry.3 If one assumes that the bonding

program will create an increase in the demand for structural steel of

$6 million, the additional requirements for labor and raw materials

can be calculated from the production function . The amount of labor

can be computed directly from the ratios described in the forepart of ·

this chapt e r . This is found to be $1,527,600 of additional l abor.

The average wage for structural steel fabrication work is $2.68 an

hour.4 Therefore, 569,776 more manhours will be required. Given an

increased demand of $6 million for final output and 569,776 more man-

hours of labor , $3,658,536 t<arth of additional raw materials will be

required . Approximately 58.7 percent or $2,147,561 of these raw

materials will be structural steel. If other things were to remain

equal and the construction created by t he bonding were to make an in-

crease of $6 million, then an extra $1.5 million t;ill have to be

spent on labor and $3.5 million more will have to be spent on raw

materials by the structural steel fabricating industry.

Another factor which will have an important effect on struc-

tural steel fabrica t ion is the highway construction plan for the

future. From the study by llilber Smith , a consultant engineer,

$776,000 ,00 0 should be spent on highway construc tion in the next 18

3schaub and Haycock, Architects , Interview, May 6 , 1965,

Logan, Utah.

4utah Department of Employment Security, Utah Annual Report

Supplement, 1960, 1963.
 42

years.5 About 3.5 percent of thi s total are structures which are pur-

chased from the structural steel fabricating ind ustry.6 Th is repre-

sents a demand for $27 million in output from the industry. Given this

increased demand, $6,852,900 labor or 2,557,052 manhours will be re-

quired. The amount of raw materials will be $16,463,415, of which

$9,665,025 will be structural steel.

The trend in construction is down s lightly from the last

several years. The authorized construction for the first four months

of 1963 was $65 ,207,000. In the same period of 1964, it was $55,571,000,

and in the first four months of 1965, it was $44 ,202,000 .7 It is ex-

pected, however, that this is only a temporary lag and that construction

act i vity will continue to follow an upward trend. As Utah 's popu-

lation grows, the demand for new construction will increase as more

homes, business offices, manufacturing facilities, etc., are needed.

With in~reased construction, there will be an increase in the demand

for structural steel.

With the function derived in this thesis, it is possible to

determine the relative importance of the var ious inputs. The function

wil l make it possible to analyze the factors that will be necessary for

future growth and what the impact will be on related industries of

given changes in structural steel fabrication. One must remember when

making forecasts that there will also be a multiplier and accelerator

5sal~ Lake Tribune, February 2 , 1965.

6oavid Sargent, State Highway Commission, May 7, 1965.

7Bureau of Economic and Business Research, Utah Construction

Report, University of Utah, Vol. 8, No. 5, May 1965.
 43

effect . Also, in making the predictions in this thesis, pure compe-

tition was assumed in the factor market. The function which best

represents· th e struc tur al steel fabrica ting industry in Utah is:

Within the limits described in the preceeding seetion, this function

may be used for forecasting pu r poses.

 LITERATURE CITED

(1) Bresler, Boris and Lin, T. Y. Design of Steel Structures (New

York: John Wiley and Sons, Inc., 1960).

(2) Brown , E. H. Phelps, "The Meaning of the Fitted Cobb-Douglas

Function," Quarte rly Journal of Economics, 11:546-66, November 1957.

(3) Bureau of Economic and Business Research, Utah Construction Report,

University of Utah, Vol. 8, No. 5, May 1965.

(4) Bureau of Economic and Business Research, "The Steel Fabricating

and Stee l-Using Industries of Utah," Utah Economic and Business
Review, University of Utah, Salt Lake City, Utah, Vol. II, No . lA,
Sep temb er 1951.

(5) Dancer, F. W., Detailing and Fabricating Structural St eel (New

York :· McGraw- Hill Book Co. , Inc.) .

(6) Douglas, Paul H. , The Theory of Wage (New York: The Macmillan
Company, 1934).

(7) Doylston, H. M., An Introduction t o the Me tallurgy of Iron and

Steel (2nd ed .; New York: John Wiley and Sons, Inc ., 1936).

(8) Fisher, Douglas A., The Epic of Steel (New ·York: Harper and Row,
1963).

(9) The World of Steel (New York: United States

Steel Corp., 1957).

(10) Steel Makin g in America (New York: United

States Steel Corp., 1949).

(11) Ess, T. J. , "United States Steel's Geneva Works," Iron and Steel
Engineer, June 1959.

(12) Leonti-<'!f, W. , Studies in Structure of American Economy (New York:

Oxford University Press, 1953).

(13) Ma thesiu s, Walther, "The Growth .of Western Steel," addressed to

a Joint Meeting cf the American Society for Metals and the American
Institute of Mining and Metallurgical Engineers, September 24,
1951, Los Angeles, California, Typescript, Department of Economics,
Utah State University.

(14) Murti, L. N. and Sastey, V. K.,"Production Function for Indian

Industry," Econometrica, 25:205-21, Apr il 1951.
 45

(15) Nelson, ElRoy , Utah's . Economic Pattern (Salt Lake City, Utah:
Un iversity of Ut ah Press, 195 6).

(16) Parker, Harry, Simpli fied Design.of Structural Steel (New York:
John Wiley and Sons , Inc., 1945) .

(17) Pub li c Relations Department, Utah-Intermountain District, United

Sta tes Stee l Corporation, Growth of the · Iron and Steel Indus try
in Utah (Provo, Ut ah) .

(18) Ri ch es, L. Victor, 1951, Th e Steel-Us ing Indus try of Utah, un-
pub l i sh ed MS ·Thesis, Un i versity of Ut a h, Salt Lake City .

(19) Salt Lake Tribune (Salt Lake City, Utah).

(20) Sa r gent, David, Inter view, St ate Highway Commission, May 7, 1965,
Salt Lake City , Utah.

(21) Schaub and Haycock, Arch it ects, Interview, May 6, 1965, Logan, Utah.

(22) Smith, Vernon L., "Eng ineering Data and S t atis tical Techniques , "
Econometri ca , 25:281-301, Apr il 1957.

(23) Su llivan, John W. W., "Steel," Encyc lopedia Ame ri cana (Inter-
national Edition; New York: Americana Corpor ation, 1946), XXV.

(24) The newsp a per clipping collection of Leonard J . Arrington, De-

partment of Economics, Utah Sta t e Unive r sity.

(25) U. S. Department of Comme r ce , Office of Business Economics,

Survey of Cu rrent Business, Vol . 40 , 41, 42.

(26-) Urguhart, Leonard Church and O'Rourke , Edward; Design of St eel

Structures (New York: McGraw-Hill Book Co., Inc., 1930).

(27) Utah Commi tt ee on Industrial and Employment Planning, Dire c t or

of Utah Manufactur es, 1963- 1964 .

(28) Utah Department of Employment Security, Annual Report, 1960.

(29) Utah Department of Emp loyment Securit y , Utah Annual Report

Supplement, 1963.
AP P E NDI CE S
 46

Appendix A

SURVEY OF STEEL .FABRICAT.ION . FOR UTAH STATE

COORDINATING COMMITTEE- BY UTAH STATE UN IVERSITY

Confidential

Gentlemen :

On July 15 Mr. Don Thomas of our research staff called on you to

explain the study we are conducting on the structural steel fabricating
indu stry . At that time you indicated that you would complete a question-
naire for us. We would appreciate as much information as is convenient
for you to give us. If you need any help in filling out this question-
naire, please feel free to contact Mr. Thomas. If you keep your re cords
quarterly, make your ent ries for the appropriate blanks disregarding th e
notation for months.

We would like to have total purchases of raw materials broken down

into purchases from roller mills and all o ther pur chases. Also, the
breakd-own of labor paymen ts into t otal wages paid (hourly personnel) and
tot al salaries (monthly personnel) if it is at all possible would be
appreciated.

Inventory Total
1963 Total Amount of Total Labor Changes of Sales of
Raw Materials Purchased Pavments Finished Manufactured
Roller Mills All Others Wages Salaries Goods Goods

Jan.
Feb.
Mar.

Jul $
Au $
Se t.$ s
Oct.
Nov .
Dec.

Total amount of depreciation in 1963 -----------------------------------

Type of depreciation used
 47

Inventory Total
1962 Total Amount of To tal Labor Changes of Sales of
Raw Macerials Purchased Payments Finished Manufactured
Rolle r Mills All .Others Wages Salaries Goods Goods

Jul
Au
Se t.$

Oct . $
Nov. $
Dec. $

Total amoun t of deprecia tion in 1962

Inventory Total
1961 Total Amount of Total Labor Changes of Sales of
Raw Materials Purchased PaY.!!!ents Finished Manufactured
Roller Mills All Others Wages Salaries Goods Goods

Jan.
Feb.
Mar.

Oct.
Nov.
Dec .

Total amount of depreciation in 1961

 48

Inventory Total
1960 Total Amount of Total Labor Changes of Sales of
Raw Materia ls Purchased Payment s Finished Manufactured
Rolle r Mills All Others Wages Salaries Goods Goods

Jan. $
Feb . $
Mar . $

A r.
Ma
June

Oct.
Nov.
Dec. $

Total amoun t of depreciation in 1960

h~at per cent of your sa l es were to general building con tra c t o rs in Ut ah?

\.fuat percent of your sales we re t o genera l construction (roads, etc .) in

Utah? __________________________________________________________________

What percent of yo ur sa l es were to subcon tra ctor s for building in Utah?

Wha t per cen t of your sa le s were to others in Utah? ---------------------

Wha t percen t of your purchases we r e from Geneva Ste el Mill s?

What percent of yo ur purchases were from other so urce£· in Utah?

What percent of your purchases were from other steel mi lls (non-Utah)?
 49

App endix B

Analysis of variance

Source d. f. m . s.

total 83
xl 1 .0440
x2 1 3 . 3220
x3 2. 6210
x4 1 .1067
x5 1 .0469
model 5 3 . 21/0
error 78 .0926

R2 = .69

Analysis of vpriance

y 70 .6 x -026 x-28 x -39

1 2 3

Source d. f. m.s .

t ota l 83
xl 1 . 0079
x2. 1 3.3960
x3 1 2.3 41 0
model 3 5.0790
error 80 .1074

R2 = .64
 51

Table 4. Continued

xl x2 X) X4 xs y

009,012 013 , 907 006 ' 930 004,299 000 , 672 042 , 557
006,848 003 , 012 003,296 003 , 485 000 , 436 027 , 580
044,205 024,057 022 , 954 019 , 964 002 , 632 088, 158
065 , 165 022 , 459 025 , 630 020 , 053 002,516 084,289
055,882 032,325 019,708 022 , 916 002,471 082,767
038,251 028 , 598 019 , 394 019,613 003 , 350 112 ' 208
052,650 016 , 619 019 ' 534 018 , 231 003,471 116' 250
040 , 618 027,611 020 , 567 019 , 330 002,537 084,992
037 , 497 013,751 018 , 397 018,028 002,240 075,154
015 ' 770 005 , 233 029 , 389 018,089 003,266 109 ' 393
044,259 029,764 019 , 906 017,966 003 ,0 53 102, 256
055 , 247 060,5 12 012,543 018 , 182 001 , 766 059,158
097 , 690 004,014 020 , 548 018 , 579 002 , 226 074,564
067 , 531 029 , 579 018 , 865 018 , 313 001 , 921 064,339
010,397 006 , 010 018,391 019 , 073 001 , 390 088,261
069 , 246 044 , 501 021 , 831 018 , 647 000 , 947 060,101
128 , 990 031 , 964 040 , 208 020 , 036 003,578 227 , 086
087 ' 658 026 , 128 133,301 018 , 667 002,739 173 , 854
052 , 761 035,004 033,837 017 ' 777 001,391 088 , 292
070 , 619 025' 81,5 026 , 808 017,522 003 , 547 225,096
054,590 020 ,09 7 026 , 597 018 , 608 001,1 55 073,305
076,455 019,475 033,447 018 , 234 002,058 130,617
094,380 060,436 028,146 018,512 003,431 217,746
032 , 425 080,100 026 , 195 017 , 806 002,545 161 , 488
050 , 746 051,879 029 , 163 018 ,198 002,764 175,403
035,800 036,968 019' 775 020 , 653 002 ,089 132 '598
04 1, 371 014,031 026,183 019 , 082 000 ' 873 035,671
045 ' 774 039,780 024 , 392 019 , 496 003,132 127,863
020 , 940 021 , 770 024 , 010 019,242 003,70 9 151,399
039 , 295 017 , 594 022,416 017,774 002 , 350 095 , 934
035 , 223 018,667 019,182 017,994 001,193 048' 721
060 ,1 79 030 , 425 022 , 421 017 ,4 49 002,348 095,872
035 , 204 024 , 967 017,755 017,606 002 , 208 090 ,1 31
042,968 039 ' 573 020 ' 881 017 , 618 001,328 054 , 208
066 , 541 026,279 018 , 419 01 7,085 003 , 63 8 148 , 494
053 , 577 071,915 026 , 404 017,415 003,929 160 ,373
096,880 019,340 018 ,79 7 017 , 226 001,168 047,693
066 , 021 026 , 366 020 , 026 018 ,6 24 003,397 138,654
020 , 756 027,821 038 , 496 024 , 000 001 , 961 124,167

xl raw materials from roller mills.

x2 other raw materials.

x3 wages paid.
 52

x4 salaries paid.

x5 capital from yearly depreciation fig ures .

Y t otal monthly sales.